Corporation Advantages and Disadvantages
You might want to start a business and are wondering what are the advantages and disadvantages of a corporation.
It’s very important to consider if a corporation is the right business structure for you.
Questions like what is a corporation, why form a corporation, and do I need a corporation all come to mind and you might just be lost.
As a national accounting firm, we’ve helped many new business owners all over the country determine if a corporation is a good choice for your business or not.
Everyone’s situation is different. A corporation might be good for you and not good for someone else even if they have a similar business. Before you incorporate your business contact us at go.gethelptax.com/start to speak with one of our tax professionals.
What is a Corporation?
A corporation is a business structure that allows the owner to protect his or her assets from business liabilities and lawsuits.
The IRS recognizes a corporation as a separate tax entity. When a business is incorporated the IRS treats it by default as a C corporation and it must file Form 1120 to report its annual activity.
How Do You Become a Corporation?
To incorporate your business, file an articles of incorporation with the state and obtain an employer identification number (EIN) with the IRS.
If you need to incorporate your business we can help you do so.
Why Incorporate a Business?
While personal asset protection is the main reason why you would want to incorporate there are other benefits also.
With a regular C corporation you can have 1 shareholder or more than 100 and those shareholders can be U.S. citizens or foreign persons.
When you incorporate a business each owner receives shares of stock. A C corporation allows you to have different classes of stock some of which would grant owners preferential treatment.
Should I Incorporate?
While incorporating a business will help protect your personal assets it will also affect how you pay taxes. For many business owners setting up an S corporation is a popular option because you can use an S corporation to save on payroll taxes. Having your business set up as an S corporation is not automatic and requires that you make an election with the IRS.
If or when you decide to incorporate your business depends on several factors including the:
- Number of shareholders
- Nationality of shareholders
- Need of administrative flexibility
- Owner’s other income sources
- Financing needs
- Shareholder’s tax rates
Before setting up a business entity on your own speak with a tax professional because there is no one-size-fits-all approach. Each owner’s situation is different.
We can not only assist in helping you choose the right business structure we also can set up the corporate documents for you. We do this for clients in all 50 states. If this is something that you’d be interested in feel free to contact us
How Do I Incorporate?
You incorporate your business by filing your articles of incorporation, typically with the Secretary of State. Most states require that the incorporator be at least 18 years old.
The actual process of incorporating a new business includes:
1. Choose a Business Name
Your business name has to be unique. You don’t want to choose a business with almost the same name if possible particularly if in the same industry.
2. Submit Incorporation Papers
To incorporate a business you have to file a document called the Articles of Incorporation. It is also known as a Certificate of Incorporation in some states.
We help business owners incorporate and form LLCs in all 50 states. Contact us if you need help with this.
3. Request an EIN
A corporation is looked upon as a separate person. It must have its own employer identification number (EIN). You can request an EIN online if you live in the United States.
When to Incorporate
You should incorporate a business after you speak with a tax professional and determine if it is the best option or you.
The structure of your business will determine how it is managed, what administrative requirements exist and how the owners will pay tax.
There are online do-it-yourself companies that will allow you to set up a business structure without first speaking with a CPA or Enrolled Agent but deciding on a business entity on your own could create a tax mess down the road.
What are the Advantages and Disadvantages of Incorporating
Every business entity has its advantages and disadvantages. A corporation is no different.
The LLC is popular but it is not recognized by the IRS. The IRS does not treat an LLC as a separate entity like it does with a corporation. A corporation is a separate entity but has some unique disadvantages because it:
- Requires the business have separate books and banking
- Taxes shareholder twice (unless S-corp election is made)
- Creates additional administrative responsibilities
Why Incorporating is Better
If you’re a one-person business, set up an LLC and do nothing else then, by default, the IRS will treat the business as a sole proprietor. If you incorporate and elect to be treated as an S-corp you can have the best of both worlds. You can get the asset protection and also the tax savings that comes with being a shareholder in an S-corp.
How Do I Pay Myself if I Incorporate
If you incorporate you essentially become an employee of your own business. We explain how to pay yourself in an S-corp in a separate article.
Requirement of an Incorporated Business
We talked about the disadvantages of incorporating. What could be a disadvantage, or an advantage, is that you must hold meetings and have shareholders consent to certain changes. There should also be a Board of Directors of the corporation.
Some people look at these additional administrative requirements as a disadvantage. Others look at it is a checks and balance to make sure that the business is running smoothly.
Benefit of Incorporating
You can enjoy the tax benefit of incorporation if you elect to be treated as an S-Corp.
In addition to the asset protection outside investors prefer to invest in a corporation (typically a regular C corporation).
A corporation also has an unlimited life. They say nothing lasts forever ….except the corporation!
In summary, don’t go it alone. It’s easy to go to a do-it-yourself site and fill out a few forms but it’s highly recommended that you speak with an experienced professional who can guide you in making the right decision for you.
Need assistance incorporating your business or forming an LLC? Contact us today. We’d be happy to help.